How to Form Your Own Opportunity Zone Fund

Ashley Tison

How can you form your own Opportunity Zone fund? What are the most important considerations when structuring your entity, and what are some best practices for regulatory compliance?

Opportunity Zones Podcast host Jimmy Atkinson and OZ Consultants CEO Ashley Tison have teamed up to create OZ Pros — Qualified Opportunity Fund and Qualified Opportunity Zone Business entity formation made easy.

Click the play button below to listen to my conversation with Ashley.

This is Part 1 of my two-part conversation with Ashley Tison. Click here to listen to Part 2: How to Form Your Own Qualified Opportunity Zone Business.

Episode Highlights

  • Step-by-step how-to for forming a Qualified Opportunity Fund (QOF).
  • The biggest considerations when forming a Qualified Opportunity Fund.
  • Who can form a Qualified Opportunity Fund, and why someone might want to do so.
  • Best practices for structuring a Qualified Opportunity Fund — the pros and cons of LLC, C-Corp, and S-Corp structuring.
  • The concept of a two-tier structure — a Qualified Opportunity Fund that invests directly in a Qualified Opportunity Zone Business.
  • The importance of following a compliance plan and creating an audit trail for your Qualified Opportunity Fund.
  • Some of the key compliance issues for a Qualified Opportunity Fund — substantial improvement test, 90% asset test at the fund level, 70% asset test at the QOZB level, gross income test, working capital safe harbor documentation, and services performed test.
  • Securities laws and SEC considerations for fund issuers who need to raise capital from outside investors.

Featured on This Episode

Industry Spotlight: OZ Pros

OZ Pros

Founded by Jimmy Atkinson and Ashley Tison, OZ Pros offers a simple document generation tool for quick and easy Opportunity Zone Fund and Opportunity Zone business creation.

Learn more about the OZ Pros:

  • Visit OZPros.com
  • Call OZ Pros: (833) 653-0055
  • Special offer for podcast listeners: Save $100 off the DIY product when you use promo code OZPODCAST at checkout.

About the Opportunity Zones Podcast

Hosted by OpportunityDb.com founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

Show Transcript

Jimmy: Welcome to the “Opportunity Zones Podcast”. I’m your host, Jimmy Atkinson. And this week I’m launching OZ Pros. I have teamed up in a strategic joint venture with Ashley Tison, an attorney and CEO of OZ Consultants to create a one, two punch in the simplification and execution of Opportunity Zone strategies.

We’ll get into that a little bit more here in a minute but first I wanna bring Ashley in. Ashley joins us today from his office in Charlotte, North Carolina. Ashley, welcome to the show.

Ashley: Thanks for having me, Jimmy. It’s always a pleasure to be on. It’s great to talk with you again.

Jimmy: Absolutely, Ashley. Happy to be chatting with you again too. So this week you and I are launching OZ Pros. For anyone interested in forming a qualified opportunity fund or a qualified Opportunity Zone business, OZ Pros essentially offers a simple document generation tool for quick and easy OZ fund and OZ business creation. To learn more, you can visit ozpros.com.

Before we dive into strategies for OZ processes, Ashley, could you first tell us a little bit about what qualifies you to be doing this type of work? Maybe you can get into your experience a little bit and talk about how OZ Pros fits into what you’re doing.

Ashley: Yeah. Happy to, Jimmy. So I’ve been an attorney for almost 20 years now and I’ve been in various practice areas but when I started out practicing law, I practiced with a big firm called McGuireWoods and we had a gazillion lawyers and offices everywhere and I really enjoyed my time there. But one of the things that they did a great job at in addition to making me work a gazillion hours was to teach me how to bring sophistication to your transaction.

And so I was…I had the fortune and opportunity to work with some great folks and to kinda learn at their feet. And so they brought me up in this sophisticated transactional world where we were doing big deals. And I ended up leaving McGuireWoods to go in house with a tenant and common sponsor where we did even more sophisticated transactions where we syndicated 1031 exchanges. And we would then package those up as a security and sold those on, you know, through the broker dealer network. And we ultimately ended up raising opportunity funds to raise development capital so we could build our own stuff and that we ended up running through the tick process as well. And those transactions were extremely sophisticated with lots of bells and whistles to them and that were fairly complicated.

And when I ultimately left Gemini and I went out on my own and I started doing mergers and acquisition deals and built an M&A practice doing that, I was looking for a way that we could bring that same level of sophistication but that we could simplify it and that we could utilize technology in order to streamline the process and in order to cut a lot of the expense out of the process but still bring that level of sophistication to kinda more, you know, mainstream level transactions.

And so, you know, that’s kinda the background of what ultimately brought me around to working in Opportunity Zones is that I was helping business owners with their tax mitigation strategies and was kinda creating customized solutions for them and I was at a CLE where I first heard about Opportunity Zones. This was back in May of 2018. And I…you know, this is one of my favorite lines. I said, “Man, this is like 1031 met private equity and they got married and had this beautiful baby that could grow up to be this unbelievable source of not only tax mitigation but also community impact.”

And so it literally hit all of my buttons and I said, “I’m all in.” And so as I jumped all in, you know, we went down different business models and how we can make it work and how we could, you know, do our thing within Opportunity Zones and we kept coming back to, “Okay, how could we best benefit the investors and the people that have money to deploy and the communities that are out there?” And the solution is that we need to get the word out to as many people as possible and we need to make this as accessible as possible to as many people as we can.

And so that kinda led to the, you know…this, you know, this conversation and this idea about, “Okay. How can I create the tools that I used in my law practice and in the M&A process to create these document sets and to streamline these transactions and bring that over into Opportunity Zones?” And, you know, voila. You know, that led to the conversation that you and I had and the creation of OZ Pros. So it’s really excited about that generation process that spits these forms out and what it’s gonna do to this industry. I think it’s got the potential to, you know, to have significant impact itself by making it more accessible to more people.

Jimmy: Yeah, that’s why I was excited to team up with you on this as well at OZ Pros. I think it’s kinda cool because we’ve lowered the barrier to entry significantly for people who may not have the capital to spend, you know, tens of thousands or even $100,000 or more on the attorney fees that typically takes for large funds to get up and running with qualified opportunity fund entity formation. You know, we’ve created a pretty simple do it yourself tool that you can access online now. So that’s…I’m excited to see how this can unlock some opportunities for folks out there who are looking to form their own funds or Opportunity Zone businesses and we’ll talk about that going forward here with today’s conversation.

So I think this is gonna be a two part episode. You know, part one here, I wanna focus on the QOF side of things and part two which will air as a separate episode will focus on QOZBs, Qualified Opportunity Zone businesses. So let’s fire things up here. Let’s dive right in. Ashley, can you tell us exactly how an individual goes about forming a qualified opportunity fund? What are some of the biggest considerations when doing so?

Ashley: Yes, I think that, you know, this goes back to what everybody’s saying was in the Opportunity Zone industry is that the Opportunity Zone incentive is in…I like calling it that because that’s really what it is. It’s not a program. It’s an incentive that’s offered to investors and it really should be icing on the cake and that’s what everybody’s been saying. And so the crucial piece is to make sure that the business deal makes sense whether that’s a property or whether that’s an operating business, is that it’s actually got to work and it actually needs to be able to make money. And you need to be able to show how the deal is going to make money and how it’s going to give a return to the investors who are following this incentive.

Now for some people, based upon the impact that it has and all of the other things, you know, that return expectation could be significantly compressed but it needs to have a return. And the second piece of that is that you need to…the project itself needs to have some measurable degree of impact. What’s it gonna do for these communities? Because that’s what this Opportunity Zone program was all about. And that’s what I’m all about. I’m all about utilizing this impact. And so that needs to be calculable and be able to be set forth. Now that’s something we can certainly help with as we kinda unpack it and help people do that through this process. But I think that those are kinda two of the most important considerations.

You know, following on after that is is this gonna be capitalized with my own money or money that I have close that’s kinda friends and family or do I need to raise money? And that determination is then going to affect how sophisticated and how in depth the, you know, the process needs to be and how much more involvement there needs to be from kinda outside people. Because if you’re gonna raise capital, I would highly, highly, highly caution you to not do that yourself and to not use a do it yourself product in order to raise capital. Now you can use it as the base for that and you can use that…you can use it to get going but sophisticated transactions where you’re raising capital because of the, you know, the securities laws associated with doing deals, they really need to be overseen and at the advice of counsel in particularly sophisticated securities counsel who know what they’re doing. Because if you violate securities laws, you can go to jail.

And so one of the things that I wanna caution people about in this podcast and we certainly do this within, you know, on the website as well is that, you know, don’t utilize this if it’s not applicable. If you’ve got a simple deal where it’s your own money, then this is a great solution and I think it’s the basis and it’s the beginning building block for a bigger transaction and it can allow you to get out of the chute and get your fund going but as you get into and as you grow that and as you grow in complication and in scope of trying to raise money and that kinda thing, there will be…need to be that next layer of sophistication that gets added onto this.

And we’re certainly able to help and that’s one of the kinda the next things that we are able to help people with kinda in our OZ Pros and Opportunity Zone consultants process but I wanna make sure to highlight that to people that while we’re trying to create this simple solution, we don’t wanna oversimplify it and that people need to be careful about what they’re doing with this.

Jimmy: Yeah, no, it’s a good thing to point out and that is why we offer both types of products. We offer two different levels of products at ozpros.com. We have the DIY product which is very simple, quick and easy but then we also do have the more customized done for you professional product as well on there. And again, you can go to ozpros.com to learn more about both of those services that we offer.

As we’re getting back to some qualified opportunity fund creation strategies, tell me who can form a qualified opportunity fund. Who can form a QOF and, you know, why would somebody want to form a QOF?

Ashley: Anyone can form a QOF and that’s the great thing about this legislation is that it basically opened the doors to anyone that wants to do it. And so that could be anybody from, like I said before, that wants to raise money for a deal or it could be anyone that has their own money to deploy into an Opportunity Zone so…and I think that the relevant part is that in order to take advantage of the Opportunity Zone legislation you actually have to have capital gains. So this whole thing hinges on that is that there has to be capital gains that go into the project. Now for startup companies and for businesses and that kinda thing, that amount of capital gains can actually be fairly minimal but there has to be some kinda capital gain that forms the basis of it.

Jimmy: And what are some of the best ways to structure a qualified opportunity fund? I know there’s a lot of different methods to structuring these funds. There’s pros and cons of each way but essentially you have to be either a partnership or a corporation. Is that right? But then can you also get into the pros and cons of structuring as an LLC versus a C Corp versus an S Corp?

Ashley: Yeah, Jimmy. So I think that the lion share of qualified opportunity funds are going to be LLCs. Now it can be an LLC or a corporation or a partnership but I think that most will be an LLC that’s taxed as a partnership. So one of the really important considerations in that is that when you set up your qualified opportunity fund you must have two members in it. And those need to be distinct members with separate employee identification numbers or tax payer ID numbers.

Jimmy: That’s at least two members, right? Because you just wanna avoid the single member LLC. Is that right?

Ashley: That’s correct. And as well because a single member LLC is a disregarded entity and so it won’t be eligible for the treatment. It’s really important that it gets set up correctly.

Jimmy: Okay, Ashley. Yeah, that makes sense. So I realize that most of these qualified opportunity funds are going to get set up as an LLC but why would somebody wanna set up a qualified opportunity fund as a C Corp or an S Corp at the fund level? Is there any reason why somebody might wanna do that?

Ashley: Yeah, I don’t know that there’s gonna be a whole lot of people that are going to undertake setting up the qualified opportunity fund either as a corporation or as an S Corp just mainly because the…when you look at the reporting requirements, most are gonna end up having this two tiered structure where you have a qualified opportunity fund that then invests into a qualified Opportunity Zone business.

So that qualified Opportunity Zone business then kinda functions like a limited partnership underneath a, you know, a holding partnership that’s up above it. And that that structure’s probably going to be for the lion share of deals the way that people will wanna set it up. Now if they wanna take advantage of the tax ramifications available in an S Corp or a C Corp, and including a really cool benefit that’s available through this Opportunity Zone program that I call C Corp arbitrage. I think that they’re…you’re probably gonna wanna do that at the QOZB level as opposed to at the qualified opportunity fund level namely because of the requirements that are imposed on the qualified opportunity fund that are a little bit more flexible once you get down into the qualified Opportunity Zone business. There’s a 90% asset rule with the qualified opportunity fund level and it’s 70% down at the QOZB level. So I…you know, you could…obviously, you could do it where you have a C Corp as a qualified opportunity fund but I would think that it would probably be very unlikely as to what that…what situation would call for where you’d actually wanna do that.

Jimmy: Gotcha. No, that makes perfect sense and we’ll look at that a little bit more in part two of this conversation which will air as the next episode in the podcast here. We’ll look more at QOZBs and how those should be structured. But getting back to the funds now at the fund level, can you go through some of the compliance issues? I recognize that starting a QOF is really easy in one sense, right. All you need to do is file IRS form 8996 and you can self-certify your partnership or corporation as a qualified opportunity fund and then in the eyes of the IRS you’re officially a qualified opportunity fund.

But in order to stay in compliance, there’s a lot of hoops you have to jump through year after year or every six months. Can you speak to some of those key compliance issues that fund sponsors need to be aware of and some of the nuances of those issues?

Ashley: Yeah, Jimmy. So as you’ve alluded to, it’s actually fairly easy to do this which is great and it’s fantastic that the government has made this to where there’s not some long in depth, you know, application process that you gotta get vetted and then you gotta wait on somebody to approve it. So literally like you said, you use our documents or similar documents and there’s some things that have to be in those formation documents that are a little bit nuanced but not difficult.

And you set that up, you follow your 8996 but then there’s some things that you’re gonna wanna have because what ends up happening is that you’re basically kinda holding yourself out there to the IRS and then the devil is in the details after that. And so that’s where…and that’s what we include within this…within our package that is, you know, the mechanics of how you can do that. Because at the end of the day what you’re doing is you’re building an audit trail. And it needs to be succinct and you really need to have a compliance plan that’s written in advance about how you’re going to build that audit trail.

And then you need to make sure that you’re following it and that you’re regularly updating it and that you’ve got all your documents there so that in the event that, you know, the fund is audited that you’re able to survive that audit by having all of the documentation that is gonna be necessary in order to prove your assertions to the IRS that you’ve complied with all of the fairly complex, you know, requirements that are contained in the Opportunity Zone legislation.

So that’s, you know…once again, right, the actual formation process is easy which is one of the reasons why we wanted to, you know, to make this product available but where it’s complicated is on the structuring and on the conversation about the structuring on the front end of the it and then the execution of it on the back end and on an ongoing basis as you operate the entities.

And so that’s the most important two pieces of this whole thing. And so I can’t stress that enough that if there’s a fairly complicated…and it’s not like, you know, vanilla, you know, transaction that there really needs to be some thought put into that and maybe some, you know, additional people brought in that are experts in that specific, you know, industry field or whatever structuring wise for the structuring of it on the front end and then, you know, the execution piece on the back end is more of a…it’s more just attention to detail and making sure that you’ve got that document trail to be able to prove it out.

Jimmy: Yeah, no, I hear you. So you definitely wanna make sure you have a documented audit trail so you can prove to the IRS that you’ve stayed in compliance, that your qualified opportunity fund has met certain tests that, you know…some of the more important ones or key ones that are commonly brought up or the substantial improvement test, the 90% asset test at the fund level, the 70% asset test at the Opportunity Zone business level, gross income test, working capital, safe harbor documentation, services performed test. You wanna make sure that you stay on top of all these different areas of compliance because as you say, the devil is in the details and, you know, at OZ Pros we do help you create that audit trail and maintain it.

Ashley: I was actually thinking about that services performed test when I was out walking my dog Max this morning. He likes to, you know, to get up early and the great thing is is that that’s usually when great ideas come. And as I was walking him I was thinking about how you actually go about documenting that because that’s actually gonna be probably one of the things that you’re gonna wanna show. Where your people are when they’re clocking in and be able to work that out so that you can show that 50% of the hours or 50% of the wages are in a specific location and tie that to a census track that’s a designated qualified Opportunity Zone.

And I’ve got a buddy that actually has a time tracking company that they have location services within their time tracking app that’s on a phone. I was like, “Man, I need to call him and talk with him about this.” Because it’s things like that that are gonna have to be done and it’s the nuanced elements of that, right, inside and way, way down into this, you know, all of the elements of the test that happen that are the things that people are gonna need to be thinking about.

Jimmy: Oh, absolutely. That’s an interesting level of detail there. I guess that’s a GPS based tracking system, time tracking system. That makes sense for a place based policy like this where certain hours have to be performed within certain geographic locations. Very interesting.

Ashley, you spoke a little bit about capital raising and SCC issues and avoiding jail time a few minutes ago but can you speak a little bit more to those issues? If somebody sets up a qualified opportunity fund and he’s already got all the capital sourced from friends and family, that’s one thing. But for somebody who’s gonna be taking their qualified opportunity fund to market, what are some capital raising considerations that the fund sponsor should keep in mind and what are the SCC issues or SCC regulatory hoops that the fund sponsor needs to consider jumping through?

Ashley: Yeah, so the SCC is actually…they set up a committee specifically for Opportunity Zones and they issued a, for lack of a better term, a whitepaper on it. And obviously they’re interested in facilitating investments and they want to make sure that people have the ability to be able to do that but at the same time, by very definition as soon as you take a dollar…if you are raising outside money from somebody and it is not your own, that is a security. Because of the structure of how these deals are done, even real-estate deals that in the past could sometimes be considered not a security and some people were treating it as such, that as soon as you do this through a qualified opportunity fund where you’re taking capital gains and then investing that into a property or especially a business that becomes a security when you start issuing those qualified opportunity fund interests.

And so accordingly, you know, you need to comply with securities laws. So the United States has federal securities laws and then each state has its securities laws as well. Probably the most popular method of complying with that is by filing a Reg D and a Regulation D exemption and then qualifying it under one of the rules under that which probably most of these offerings that are out there will be rule 506(c) which allows for general solicitation and allows for people to advertise the deal.

But that’s a…that is a complicated process and even though that, you know, that it is under a Reg D 506(c) exemption, there still needs to be disclosure requirements which are usually met by doing a private placement memorandum. And inside of that private placement memorandum there needs to be specific disclosures relative to the complicated nature of Opportunity Zones and all of the, you know, the things that go into that. And so, you know, it needs to be done by a qualified securities counsel and I would even say qualified securities counsel that knows what they’re doing inside of Opportunity Zones.

The great thing is, you know, Jimmy, is that you and I know lots of those folks and we’ve worked with some great professionals kind of across the nation and, you know, we’ve got the ability to be able to identify when people need that and then match them up with, you know, the right folks who can help them out. And so that’s one of the kind of the benefits and the…kind of the great things that I love about my job is being a matchmaker and saying, “Okay. Hey, here’s something that, you know, you need to be thinking about and you need to be aware of.” And then, “Okay, here’s somebody that I could I could plug you in with who could help you out with that.”

And so…and kinda in this role and what I’m doing here is that it’s great for me because I’m not…I actually got out of, you know, actually doing legal work. So I am an attorney and you can’t take the law out of the lawyer but I’ve tried to, as much as I can, take the lawyer out of the law and I like to call myself a reformed lawyer. And the great thing about being a reformed lawyer is that I get to make recommendations to non-reformed lawyers who are out there lawyering every day. And so it’s been cool to work with those folks and to have that kind of arrangement set up and to be able to get people plugged in with the right folks.

Jimmy: Oh, that’s great. I love that term, reformed lawyer. And yeah, you have built up quite a large network of lawyers and accountants across the country who you can refer people out to, especially in the OZ space, people who are…have been studying and thinking carefully about Opportunity Zone law and Opportunity Zone regulations for the last almost couple of years now, so.

Well, Ashley, I think we’ll cut it here. That’ll be the end of part one, forming a qualified opportunity fund. In part two which will be the next episode in this “Opportunity Zones Podcast” series, you and I will discuss strategies for forming a qualified Opportunity Zone business.

Again for our listeners out there today, Ashley and I have set up ozpros.com where you can begin creating your qualified opportunity fund today for a low price and even better, for our podcast listeners, those of you listening right now, we have a coupon code for you to use that will be good until December 1 of 2019. If you use promo code OZPODCAST at checkout, that’s O-Z-P-O-D-C-A-S-T, OZPODCAST at checkout, you can save $100 off of your first order under the DIY plan. So go check us out at ozpros.com and special offer there for our podcast listeners during our launch period here now until December 1, 2019.

Okay, so we have that DIY option with that special offer but if you’re not quite ready to organize the documents yourself or undertake that, maybe you have that some questions about Opportunity Zones, Ashley normally charges $450 per billable hour to get on the phone with you but for a limited time if you come through ozpros.com you can book a call right there. It’s one of the options that you’ll see on the website. And Ashley’s offering a $99 Opportunity Zone strategy session for a half hour phone call with him and this phone call is specifically designed to answer questions about structure and setup of your qualified opportunity fund or qualified Opportunity Zone business and to potentially identify any pitfalls or any other Opportunity Zone concerns that you may have.

Ashley, thanks for chatting with me today and I’m looking forward to part two of our conversation when we’ll discuss how to form a qualified Opportunity Zone business.

Ashley: Looking forward to it, Jimmy.

Jimmy Atkinson

Jimmy Atkinson

Hi, I'm Jimmy Atkinson... I founded OpportunityDb in August 2018. I'm a veteran Internet entrepreneur with a background in economics and Web marketing. I previously founded ETFdb.com. These days, I am passionate about impact investing and tax-advantaged investment opportunities. At the crossroads of these two ideals is the opportunity zones program, a place-based tax policy intended to economically transform some of the poorest areas of the United States with new real estate and business development.

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